Downtown office towers set sales record in 2006

Demand for downtown office towers is making 2006 a record year in total dollar sales volume, with more than $5 billion worth of transactions completed so far this year.

Demand for downtown office towers is making 2006 a record year in total dollar sales volume, with more than $5 billion worth of transactions completed so far this year.

The previous high-water mark was $3.3 billion set for all of 2005.

After a strong third quarter, which recorded nearly $1 billion in completed sales, the office market surged forward in October and November and included many of this year's most prominent transactions.

Between January and September, deals totaling more than $3.1 billion were completed, 36% more than the same nine-month period in 2005, according to a report by real estate firm Jones Lang LaSalle Inc. And since the third quarter, sales totaling more than $1.9 billion have closed.

That would bring the total to $5.1 billion through Nov. 31. And a few more transactions could still close before Jan. 1, further boosting the annual total.

OFFICE MARKET SHATTERS

RECORD

With nearly $5.1 billion of downtown office

buildings already sold this year, the investment market has broken last year's record of $3.3

billion.

align=center>Q1-Q3

2005

align=center>Q1-Q3

2006

align=center>Oct.-Nov.

2006

Transactions

align=center valign=top>16

20

class=smaller align=center valign=top>10

Square feet

align=center valign=top>11.7

million

valign=top>14.6

million

6.8

million

Total price

align=center valign=top>$2.30

billion

valign=top>$3.14

billion

valign=top>$1.95

billion

Avg. price per sq. ft.

align=center valign=top>$197

$214

class=smaller align=center valign=top>$286

Q3/2005

class=smaller align=center>Q3/2006

Transactions

align=center valign=top>7

5

bgcolor=ffffff>

Square feet

align=center valign=top>4.7

million

valign=top>4.4

million

Total price

align=center valign=top>$1.01

billion

valign=top>$964.5

million

Avg. price per sq. ft.

align=center valign=top>$227

$217

bgcolor=ffffff>

Source: Jones Lang LaSalle

Inc.

The pace of sales earlier this year created the expectation that 2006 would be a record-setting year, and the buying spree may continue into next year.

On a national basis, prices may have peaked for most types of commercial real estate. But there may be exceptions, according to a recent report by Prudential Real Estate Investors LLC.

"Historical data makes a very compelling case for a rotation into the office sector," the Prudential report says, which could underpin further deals in that market.

In downtown Chicago, deals closing in the last two months have an average price of $286 a square foot, more than a third higher than the average of $214 a foot during the first three quarters of 2006.

Several factors account for this year's remarkable showing.

"We definitely have seen a number of new investors come to the market this year, and the vast majority of those were private investors," says Bruce Miller, managing director in the capital markets unit of Jones Lang LaSalle. "And a lot of those people came into the market really because of their ability to borrow aggressively -- low interest rates and a higher degree of leverage."

In early November, first-time Chicago buyers were responsible for two high-profile and widely anticipated transactions.

Southern California developer Olen Properties Corp. on Nov. 1 bought 1 S. Dearborn St. for a record-setting price per square foot from a venture that includes developer Hines Interests LP. In its first Chicago acquisition, Olen paid $350 million, or $422 a square foot, for the 828,500-square-foot tower, property records show. Some sources say the total price was $352.7 million. On a per-square-foot basis, it is the highest price every paid for a Chicago office building.

Seven days later, a venture than includes New York investor Robert Gans purchased Citadel Center, 131 S. Dearborn St., from a joint venture of Prime Group Realty Trust and German investors. Mr. Gans reportedly paid $560 million, $373 a square foot for the 1.5-million-square foot structure.

Sales activity during the third quarter was robust, yet the total dollar volume of transaction was slightly smaller than the total for the same period in 2005, which was an unusually strong quarter.

Moreover, prices actually fell more than 4% to $217 a square foot during the 2006 third quarter compared to the year-earlier period. But the declines are "purely a timing quirk," Mr. Miller says.

When $3.3 billion in downtown office buildings were sold in 2005, it was the highest total in the history of the downtown office market.

The next highest total was in 1998, when assets worth $3.1 billion were sold, Jones Lang LaSalle says.

Among the notable third-quarter transactions:

Boston real estate investment firm Beacon Capital Partners Inc. bought One Financial Place, a million-square-foot tower at 440 S. LaSalle that's home to the Chicago Stock Exchange, from a partnership controlled by MetLife Inc. that included German investors. The price was reportedly $255 million.

Next year's boost to the local investment market is likely to come from Blackstone Group's pending acquisition of Equity Office Properties Trust, which controls nearly 12 million square feet of office space in the city and suburbs.

"It is a pretty solid bet that we will see the majority of those assets trade next year," Mr. Miller says.

Photo

Recommended for You

Sign up for newsletters

Morning 10

-

Need-to-know stories from Crain's and around the web. Monday-Friday at 7 a.m.

Today's Crain's

-

A roundup of the day's important business news. Monday-Friday around 3 p.m.

Breaking News Alerts

-

Up-to-the-minute info on what's happening in Chicago business right now.

Health Pulse Chicago

-

Your source for actionable, exclusive and inside news and data on the health care industry. Monday, Wednesday and Friday at 5:30 a.m.